Briefing Document & Podcast: ECJ C-126/14 (Sveda UAB): Ruling Confirms VAT Deduction Rights for Public Recreational Paths Linked to Economic Activities

Subject: Analysis of the European Court of Justice (ECJ) Judgment regarding VAT Deduction on a Public Recreational Path

Executive Summary:

This document analyzes the ECJ’s judgment in Case C-126/14, concerning the VAT deductibility of expenses related to the construction of a recreational path intended for public use free of charge. The case addresses whether a taxable person (Sveda UAB) is entitled to deduct input VAT paid on capital goods where those goods are directly intended for free public use but are also designed to attract visitors who will then purchase taxable goods and services from the taxable person. The ECJ ruled that the VAT Directive can grant the right to deduct VAT in these circumstances, provided there is a direct and immediate link between the expenses and either an output transaction giving right to deduct, or the taxable person’s economic activity as a whole. VATupdate.com is a service that provides concise case summaries, legal analysis, and relevant updates to help tax professionals stay ahead of changes in EU VAT law.

Background:

Sveda UAB, a Lithuanian company involved in tourism-related activities, entered into a subsidization agreement to construct a “Baltic mythology recreational and discovery path” offering free public access. Sveda sought to deduct the input VAT paid during the construction. The Lithuanian tax authorities denied the deduction, arguing that the goods and services acquired were not intended for VAT-taxed activities. The case was referred to the ECJ for a preliminary ruling on the interpretation of Article 168 of the VAT Directive (2006/112/EC).

Key Legal Question:

Can Article 168 of the VAT Directive be interpreted as granting a taxable person the right to deduct input VAT paid on non-current assets intended for business purposes that are directly intended for free public use, but may attract visitors to a location where the taxable person plans to supply taxable goods and/or services?

ECJ Reasoning and Ruling:

The ECJ reaffirmed core principles of VAT deductibility:

Right of Deduction: “The right of deduction provided for in Article 168(a) of the VAT Directive is an integral part of the VAT scheme and in principle may not be limited.” This emphasizes the fundamental nature of VAT deduction.
Neutrality of Taxation: “The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT.”
Acting as a Taxable Person: A person incurring investment expenditure with the intention of engaging in economic activity is considered a taxable person. “It is settled case-law that a person who incurs investment expenditure with the intention, confirmed by objective evidence, of engaging in economic activity within the meaning of Article 9(1) of the VAT Directive must be regarded as a taxable person.”
Direct and Immediate Link: The existence of a direct and immediate link between a particular input transaction and an output transaction giving rise to entitlement to deduct is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement.
General Costs: The Court held that a taxable person also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the expenditure incurred is part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such expenditure does have a direct and immediate link with the taxable person’s economic activity as a whole

The ECJ held that providing the recreational path free of charge doesn’t automatically negate the right to deduct VAT. The crucial factor is whether there is a “direct and immediate link” between the expenses and either:

A specific output transaction that generates the right to deduct VAT.
The taxable person’s overall economic activity.

The Court found that if the recreational path serves as a means of attracting visitors who will then purchase taxable goods and services from Sveda, this constitutes a link to their economic activity, even if access to the path itself is free.

Ruling:

“Article 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as granting, in circumstances such as those in the main proceedings, a taxable person the right to deduct the input value added tax paid for the acquisition or production of capital goods, for the purposes of a planned economic activity related to rural and recreational tourism, which are (i) directly intended for use by the public free of charge, and may (ii) enable taxed transactions to be carried out, provided that a direct and immediate link is established between the expenses associated with the input transactions and an output transaction or transactions giving rise to the right to deduct or with the taxable person’s economic activity as a whole, which is a matter for the referring court to determine on the basis of objective evidence.”

Implications:

This judgment clarifies the VAT treatment of investments in public amenities that are intended to indirectly generate taxable revenue. It affirms that VAT deduction is possible even when an asset is initially provided free of charge, as long as a direct and immediate link to taxable economic activities can be established. The burden of proof rests on the taxable person to demonstrate this link.

Relevance to VATupdate.com:

According to the marketing copy provided, VATupdate.com “delivers concise case summaries, legal analysis, and relevant updates.” This judgment, and similar cases involving EU VAT law, are the type of content that VATupdate.com provides to its users. The company claims to provide updates that are “clear, timely, and expertly curated insights into the latest ECJ, CJEU, and General Court VAT rulings.” This is essential for tax professionals who need to stay informed about the latest developments in EU VAT law.

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